Failure to File Returns or Pay Tax

Failure to file returns or pay taxes is a federal tax crime that will be prosecuted by the IRS. The offense is enumerated in IRC § 7203, which states: “Any person required under this title to pay any estimated tax, or required by this title or by regulations made under authority thereof to make a return, keep any records, or supply any information, who willfully fails to pay such estimated tax or tax, make such return, keep such records, or supply such information, at the time or times required by law or regulations, shall [be guilty of a misdemeanor].” It goes on to list five separate misdemeanor offenses:

1. Willful failure to make (or file) a return;
2. Willful failure to pay tax;
3. Willful failure to pay estimated tax;
4. Willful failure to keep records;
5. Willful failure to supply records.

Violation of this statute is punishable by up to one year of imprisonment, as well as a fine of up to $100,000, plus the costs of prosecution.

What is the Failure to File Tax Crime?

Of the five misdemeanor offenses identified under IRC § 7203, failure to file is by far the most frequently prosecuted tax crime. In order to establish a violation of the statute for failure to file, the government must prove the following three elements: 1) the taxpayer had a legal duty to file a return for the taxable year; 2) the taxpayer failed to file a timely return; and 3) the failure to file was willful.

Element 1: Legal Duty to File Return

The first element is that the taxpayer had a legal duty to file a return. The taxpayer has a legal duty to file a return if he or she had gross income equal to the minimum threshold identified in IRC § 6012. If the government pursues a prosecution against the taxpayer under this statute, the government simply has to show the taxpayer had this legal duty, but there is no requirement for the government to prove additional tax due and owing. Thus, the legal duty to file is dependent upon the government being able to show gross income received regardless of whether tax is owed. That being said, if there is no additional tax due and owing, the government is unlikely to actually prosecute the taxpayer because willfulness will be difficult to prove.

Element 2: Failure to File a Timely Return

Second, the government can show that the taxpayer failed to file a timely return by providing testimony from the IRS to the effect that a diligent search was performed, but no tax return located. The government may also provide a certified transcript stating that the taxpayer has not filed a tax return for the relevant years.

Sometimes in these cases, there can be debate over whether a document supplied by the taxpayer suffices as a tax return for the purposes of IRC § 7203. As a general rule, if a document does not contain income and deduction information from which the IRS can compute tax liability, then it cannot be considered as a tax return under section 7203. This question is a question of fact for a jury to determine under proper jury instructions.

The willful failure to file offense is impacted by the date on which the taxpayer had a legal duty to file the return. In fact, the time required by law for filing the tax return is crucial to the success of the government’s prosecution. The government must allege and prove the date that the duty to file arose and show that the taxpayer’s failure to do so was willful as of that date. Thus, if the taxpayer obtains an extension allowing him or her to file after April, the government cannot try to claim that a willful failure to file existed as of April 15.

What is Willfulness Under IRC § 7203?

As with other criminal statutes requiring a showing of willfulness, under IRC § 7203, willfulness can be showed by proof of a voluntary, intentional violation of a known legal duty. Here, the legal duty at issue is the duty to file a timely return. A good faith but erroneous belief about the need to file a timely return is a valid defense to the willful-failure-to-file charge under IRC § 7203. The defense has a subjective standard and is dependent upon whether the taxpayer actually had such a belief. A good-faith disagreement with the law or a belief that the law is unconstitutional is not a valid defense.

In proving willfulness on the part of the taxpayer, the government typically relies upon circumstantial evidence. Failure to file returns for a number of years is admissible evidence, whether the failure to file occurred before or after the years being prosecuted. To demonstrate that the taxpayer was aware of the duty to file tax returns, the government may provide proof that the taxpayer filed tax returns in previous years. Willfulness can also be shown by failure to file state income tax returns, evidence that the taxpayer received W-2 forms before or during the prosecution years, or evidence that the taxpayer received advice from an accountant or lawyer regarding the duty to file. Evidence that a taxpayer attempted to conceal income is also admissible to establish willfulness under IRC § 7203.

Willfulness is not negated by any of the following: lack of intent to defraud or evade tax, intent to file in the future, pressure of business or personal affairs, procrastination, fear of discovery of a failure to file, or fear of self-incrimination.

How a Tax Attorney Can Help

If you are under investigation by the IRS under the failure to file returns statute, then you must consult with an experienced tax attorney. The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with criminal tax issues since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.